Australia's economy expanded in Q3 at its slowest annual rate since the pandemic, falling short of expectations for a recovery.

The growth was primarily driven by government spending, while consumer activity remained subdued.

The Australian Dollar fell 0.7%, trading at $0.6442, as investors adjusted their expectations. Markets now almost fully price in a rate cut in April, with the likelihood rising to 96% from 73% earlier, and anticipate a 35-basis-point easing by May, up from 28 bps, Reuters reports.

According to the Australian Bureau of Statistics (ABS), data released on Wednesday revealed that real GDP grew by 0.3% in the September quarter, falling short of market expectations of 0.4%.

Annual growth decelerated to 0.8%, down from 1.0% in the previous quarter, contrary to forecasts of a modest rise to 1.1%, marking the slowest growth rate since late 2020.

The Reserve Bank of Australia had projected economic growth to reach 1.5% by year-end, driven by tax cuts boosting household incomes and growing consumer confidence that interest rates would remain steady.

However, the unexpectedly weak third-quarter performance now casts doubt on achieving that forecast.

“Put it together on balance, the weak GDP numbers argue for an earlier rather than later cut,” stated Shane Oliver, chief economist at AMP.

“The weakness we're seeing in the economy, particularly the private sector of the economy, just indicates that there's still a high chance that we could get a cut in February.”

The ABS reported that growth in Q3 was largely driven by public sector spending, contributing 0.6 percentage points to GDP, supported by record-high public investment. In contrast, household spending, which makes up half of GDP, showed no contribution to growth.

Treasurer Jim Chalmers characterised the GDP growth as weak and below historical norms.

“Our economy is still growing but very slowly. It's weighed down by interest rates and cost of living pressures and the global economic uncertainties as well,” Chalmers stated.

The central bank has maintained interest rates at a 12-year high of 4.35% for the past year, with little indication of easing in the near future. The sluggish economic performance suggests that tight monetary policy is effectively curbing demand.

While the RBA anticipated a boost in consumer spending from tax cuts and easing inflation, consumers remain cautious. Despite a 1.5% increase in disposable income during the quarter, spending has yet to pick up as expected.